Velodyne: Decent Upside In The Face Of Troubled Management
Summary
- Velodyne has much room to grow and heightened volatility could make for an interesting paired option trade in the low teens.
- Velodyne projects that it could reach up to 9mm units shipped by 2025 if all contracts are awarded, yet current awards could yield 750k-900k in cumulative shipments.
- If ASPs drop by ~20% to $4,700 by 2023, and with unit volumes 5x higher to 55,000, Velodyne could see revenues at $260 million.
Advancements towards automation through lidar in a wide range of applications, specifically electric vehicles and robotics, provides a longer-term runway of growth potential for companies looking to innovate and grow into the space. Velodyne (VLDR), Luminar (LAZR) and Ouster (NYSE:OUST) are three of the main leaders in pure-play lidar, with Aeva (AEVA) and Innoviz (INVZ) recently going public. Although the company has been plagued recently with possible market share risks and management troubles, Velodyne has much room to grow and heightened volatility could make for an interesting paired option trade in the low-teens.
Trends and End Markets
Lidar [light detection and ranging] is a type of remote sensing where lasers are used to determine distances of varying objects relative to the sensor and also create 3D image projections; this allows the technology to find heavy residual usage in the auto market, auxiliary vehicle market (drones, helicopters, etc.), security and robotics.
Velodyne's targeted end markets include automotive - autonomous driving/ADAS, robotaxis, contactless delivery solutions/robotic delivery, railways - and security and smart cities - intelligent intersections, traffic management, and drones. Velodyne has continued to advance itself in the auxiliary markets, recently announcing a multi-year agreement with AGM Systems for UAV mapping and a continuation of the seven-year agreement with Knightscope for its fifth-gen security robots.
Through FY20, Velodyne has had over 300 customers, with over 51,000 units shipped generating over $670 million in cumulative lifetime revenue. Customers include early investors Baidu (BIDU) and Ford (F), which has since sold its 13 million share stake, other OEMs GM (GM), Caterpillar (CAT), and Honda (HMC), as well as Google (GOOG) (GOOGL).
In terms of end-market opportunities, Velodyne is projecting a majority of future deliveries to be concentrated in automotive end-markets: ADAS the largest by 2023-24, with AV and delivery growing significantly by 2025.
Graphic from Velodyne
Of the 194 projects estimated to yield the 9 million unit shipment figure, 26 have already been signed, as of February. About half of the 168 unawarded are still in the pre-RFI stage, with another two-fifths in RFI/RFQ. This means that there are still multiple years before these contracts either are signed/awarded or before revenue recognition and production/shipment occurs.
While most of Velodyne's current products are solid state sensors, the company is branching out into hemispherical sensors and software in the future, with the latter helping revolutionize ADAS functions like automatic emergency brake, lane keeping assist and others by integrating with Velarray.
End market opportunities for Velodyne look promising currently, given the breadth in the potential project runway through 2025 - there's no extreme concentration in one end market that leaves it vulnerable. ADAS, AV and robotic delivery solutions are gaining steam with the electric vehicle push, and the underlying trend towards smarter, more advanced vehicles continues to grow. Velodyne's status as the current market leader and first mover should see it lock in a majority of the projects it has in its pipeline, cementing a positive runway for shipments and revenues.
Growth Outlook
Velodyne's growth outlook remains on a longer-term basis, with much of the growth concentrated during 2022 and beyond, given the long timelines between pre-RFI and signing of agreements.
2021 could be a tough year for revenues, with -6% to -1% revenue growth the likely outcome for the year with minimal uptick in deliveries combined with lower ASPs weighing down on revenue growth. However, the 26 signed contracts look to represent about 750,000 to 900,000 cumulative units through 2025, with the growth surfacing through 2022 and 2023; yet this will still likely see Velodyne "lowering ASPs and driving higher volumes," which will come at a slight cost to revenue growth.
Even with weak revenues in 2020 and likely weak revenues in 2021, Velodyne has started to see positive synergies within margins stemming from manufacturing. Automated production, lower-cost mass production, partnerships with Nikon (TSE:2217), Veoneer (VNE) and Fabrinet (FN), and a move to Thailand should continue to aid margins as volumes expand significantly in 2022 and beyond, as Velodyne has already seen gross margin expand 470 bp in 2020 with revenues down y/y. Declining operating expenses y/y allowed operating loss to shrink slightly.
2020 saw Velodyne ship sensors at an ASP of ~$5,800, although Q4's ASP looks to have sat around $3,400. Reductions in ASP by 10-20% or higher are possible over a long-term time frame with more competition and more internal desire to lower ASPs to drive volumes; assuming ASPs drop by ~20% to $4,700 by 2023, and with unit volumes 5x higher to 55,000, Velodyne could see revenues at $260 million, excluding a small amount in licensing, likely $10-20 million. With more volume, gross margin should be able to rise 800-1100 bp to 42-45%, thus enhancing a shift to profitability.
However, if Velodyne ends up securing a dozen or so contracts in the next eight months, it could possibly push units up to 100,000, thus pushing revenues nearer to $350-400 million by 2024. Velodyne does expect about $1 billion from the current signed agreements by 2025, justifying those revenue projections; unawarded projects could yield up to $4.4 billion if all are secured.
Revenue growth remains highly positive, but only on a long-term basis, making Velodyne apt for a long-term position at the current valuation around $2.5 billion. Although there are a few risks that could easily lead to downsized revenue forecasts or share performance, Velodyne's current volatility and expected revenue growth at just under 10x 2023 sales look attractive. Taking advantage of high volatility can bring average cost down: a buy-write for the Sept. '17 $20 call would bring in $1.75 in premium, bringing cost down to $11.75 and profit potential to 61%, while the Dec. '17 $22.50/$25 calls would bring in $2.25/$1.95 in premium, bringing cost down to $11.25/$11.55, and profit potential to 83%/99% if shares do happen to rise above those strikes.
Risks
Velodyne, even as the market leader, isn't immune to competitive risks, and has quite a few that have surfaced during 2021 internally as well. Such risks can impact share price performance, investor trust/confidence and revenues.
The lidar industry is ripe with competition, with multiple players each bringing different types of sensors to market for similar applications - it is then up to the customer to select the type of sensor desired.
Although Velodyne does have quite a large project pipeline with certain factors like high switching costs, integration/software development to fit around Velodyne's sensors, time and long-term contracts that should serve as a moat to keep customers with the company, many of the contracts in pre-RFI and RFI mean nothing until they are signed, as a customer still can switch to a different manufacturer at that point in time.
Berenberg noted that Velodyne could be "losing spinning lidar share and faces stiff competition in directional lidar," and more competition in AV/ADAS, two major end markets, could lead to less share, less projects and less revenues.
Internally, Velodyne has seen some issues recently. In a filing in mid-March, management noted that it found "'material weakness' in its internal control over financial reporting [and] failure to adequately review revenue schedules associated with non-standard revenue arrangements, which resulted in misstatements of revenue and deferred revenue."
While the revenue schedules have been fixed, failure to maintain effective control over reporting erodes investor trust. This could heighten the probability for more downside for shares if investors doubt internal forecasts or if more material weaknesses surface in upcoming quarters.
Just prior to that development, founder and CEO David Hall resigned, stating that the SPAC founders "wanted to curtail [his] involvement in the quality and selection of products being developed, the contracts negotiated and integrity of the Company's business moving forward," which has led to "an anti-stockholder culture" after increasing Gopalan's compensation even after the subpar Q4 earnings report and guidance.
Mr. Hall believes that the board has "prioritize[d] its own self-interests over stockholders and has overseen the destruction of significant stockholder value." Such a development also will curtail investor trust, as a typical safe/smart long-term investment is one that returns value to shareholders, not destroys it.
Overall
Velodyne has established itself as the first mover and market leader in lidar, but the industry is expanding rapidly and quickly filling with competition. Revenues for 2020 were quite weak as ASP declines cut into flat shipments, and revenues for 2021 are likely to see slight declines y/y with lower ASPs the main factor.
However, the long-term growth outlook is positive in the face of competition and potential market share trouble, with signed/awarded contracts likely yielding 8-10% of a possible 9 million cumulative shipments by 2025; with 168 still-unawarded contracts, growth potential remains significant.
Revenue growth atop an exponential uptick in shipments could see Velodyne generate $260 million in product revenue by 2023, putting it just below 10x sales. A medium-term buy-write could allow a position to be started while shares hover near lows, capitalizing on high volatility and capturing high premiums for 60-100% return potential before the year-end.
This article was written by
Analyst’s Disclosure: I am/we are long VLDR. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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